IMF Survey : India’s Economic Picture Brighter, but Investment, Structural Reforms Key

IMF News, March 11, 2015

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Indian economy is reviving, helped by positive policy actions that have improved confidence and by lower global oil prices.
India is described as "the bright spot in the global landscape," becoming one of the fastest-growing big emerging market economies.
New investment project announcements have started to pick up, particularly in the power and transport sectors.
The IMF notes the need to revitalize the investment cycle and accelerate structural reforms to continue the positive trend.
Risks noted:
- External: spillovers from weak global growth and potential global financial market volatility, including as the United States begins to raise its interest rates.
- Domestic: weaknesses in corporate balance sheets, an increase in corporate leverage in recent years, and worsening bank asset quality that could weigh on growth.

Based on revised national accounts, the IMF forecasts:
- growth will strengthen to 7.2 percent in 2014/15; and
- rise to 7.5 percent in 2015/16.
The revised GDP series incorporates numerous conceptual and methodological improvements and portrays a more resilient performance of the services and manufacturing sectors.
IMF staff report was prepared before the release of the new growth numbers; the IMF will continue to examine the improved GDP methodology and its implications for growth forecasts.

Inflation has fallen by half to around 5 percent, after hovering around 10 percent for several years.
The report commends the Reserve Bank of India (RBI) for tightening monetary policy by raising interest rates during 2013–2014.
The government’s steps to contain food inflation—releasing buffer stocks of cereal and keeping agricultural procurement prices in check—are noted.
The government’s move to introduce a flexible inflation-targeting framework is called "a clear positive" to help deliver low and stable inflation.

Central government’s fiscal deficit fell to 4.1 percent of GDP in 2014/15, helped by lower oil prices.
Government actions cited: deregulation of diesel prices and raising natural gas prices.
Report suggests further fiscal measures:
- increase tax revenues, including through better tax administration;
- control spending through further streamlining of subsidies;
- boost spending on infrastructure (roads and ports, electricity transmission) and social spending (public health, education) to improve quality of expenditure.
Policy proposals encouraged:
- adoption of a national goods and services tax to create a single Indian market by replacing myriad local levies;
- continued move toward direct cash transfer payments—helped by Aadhaar—to better target subsidies and reduce leakages.

Investment activity remains held back by structural and supply-side constraints.
Key reform areas identified to raise growth and generate jobs:
- addressing bottlenecks in the energy, mining and power sectors;
- increasing investment to help close major infrastructure gaps;
- simplifying and expediting the process of acquiring land and obtaining environmental clearances;
- reforming the agriculture sector to ensure greater efficiencies in food procurement, distribution, and storage;
- making labor markets more flexible to encourage young job-seekers and boost presently low female labor force participation;
- improving education to meet rising shortages of skilled labor.

Within the next 15 years, India will have the largest, and among the youngest, workforces in the world.
India will need to create jobs for the roughly one hundred million young Indians who will enter the job market in the coming decade.
Deeper structural reforms are required to raise growth rates and generate sufficient jobs.

IMF Survey : India’s Economic Picture Brighter, but Investment, Structural Reforms Key — March 11, 2015.